US aerospace industrial base is running out of time

The Hill ^ | October 08, 2015 | David F. Melcher 474

[E. Pluribus Unum]

With the recent news that a $1.1 billion order for Boeing jetliners by South African airline Comair is at risk of cancellation, on the heels of recent announcements of three lost U.S. commercial satellite sales, the failure of Congress to hold a vote on re-authorization for the Export-Import Bank of the United States (Ex-Im) can now be seen clearly as an example of how inaction is causing the American aerospace industry to lose ground against its foreign competitors, and potentially thousands of workers to lose their jobs.   

U.S. companies large and small have been telling members of Congress for months now that overseas customers are going to buy from their foreign competition in the absence of the ExIm Bank matching finance options provided by every other foreign government.  Sadly, these warnings have been ignored. 

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This dynamic is especially true in the aerospace industry, where U.S. companies have consistently generated an export surplus ($61 billion in 2014) when we have had a level playing field to compete.  Plain and simple, our companies cannot compete alone against foreign companies and foreign government financing at the same time. 

Critics of Ex-Im cannot be more mistaken in their claims that Ex-Im’s financing is “corporate welfare;” in the aerospace industry, the thousands of companies that are an integral and integrated part of the supply chain for aircraft as well as the space industrial base are at risk.  For these suppliers, there will be the initial loss as U.S. aircraft and satellite manufacturers begin to slow down their production.  There will be an even greater impact going forward for aircraft suppliers as they lose the aftermarket maintenance, repair, and overhaul revenue that lasts as long as exported aircraft are in service. 

The timing of losing Ex-Im support could not be worse for the aerospace industry given the downturn in U.S. defense spending.  The shared aerospace and defense industrial base that supplies our military is relying more on commercial sales to sustain itself and innovate, and more than 80 percent of that commercial production is exported.  Besides risking high skill and high wage jobs, our national security is also jeopardized as many small and medium sized suppliers will find themselves unable to survive, let alone compete, without support for exports from Ex-Im.  

The purchase and payment lead times in our industry are long, and the clock is ticking.  The price for delay in the vote to re-authorize Ex-Im is going up every second, and our nation’s security and economy will ultimately bear the cost.

Melcher (LTG U.S. Army-Ret.) is the president and CEO of the Aerospace Industries Association.

[Soul of the South]

You stated correctly, “Ex-Im financing guarantees are intended to facilitate exports by bridging gaps in jurisdictional authority so that banks can lend money with a relative degree of security in circumstances where that might not otherwise be possible.”

In other words through the Import/Export Bank the US government assumes financial risk actors in the private market are unwilling to take. It is surprising someone who professes to be a principled disciple of Friedman and Hayek can justify this government intervention in markets. However, throughout life I’ve learned most people will bend principle when it conflicts with their own economic interests.

With respect to the Import/Export bank not providing subsidized interest, I suggest you read a 2015 publication of the Mercatus Center at George Mason University. Mercatus is a research center dedicated to free market ideas you profess to admire. Coincidently, in addition to its research, the center sponsor a speaker series named after Mr. Hayek.

The title of the study is: ‘The Export-Import Bank’s Top Foreign Buyers” and it is authored by Veronique de Rugy and Diane Katz. Rugy is from the Mercatus Center and Katz is from the Heritage Foundation. One might characterize them as principled free market advocates in the tradition of Hayek and Friedman. A link to the article follows: http://mercatus.org/sites/default/files/Rugy-Ex-Im-Top-Foreign.pdf

Contrary to your assertion the Import/Export bank’s activities do not result in interest subsidies, I recommend you read pages 10 and 11 of the paper relating to the real example of the financing of planes sold by Boeing to Air Emirates. Emirates bought 4 Airbus 380’s and 2 Boeing 777’s in June of 2012. The Airbus planes were financed in the private market, the Boeing planes received Import/Export bank financing. As the article points out, it is obvious an airline controlled by the government of the Emirates could afford private financing.

Speaking to the Emirates transaction with respect to the Import Export Bank financing effectively creating interest subsidies the article states: “The subsidies enjoyed by Emirates impose a very real cost on US airlines. With Ex-Im Bank assistance, Emirates financed its purchase of planes at interest rates that were almost half the cost paid by their unsubsidized competitors. That saved Emirates about $20.3 million per plane—savings that translated into far lower operating costs.” In effect, the US taxpayers by assuming the financial risk of the transaction through the Import/Export bank, allowed the bank to extend Emirates a below market interest rate. American carriers Delta, American, United, etc. paid higher rates in the private markets for their planes because the risk associated with loans to US domestic carriers are not backed by the full faith and credit of the taxpayer.

You closed your last post by stating you are “outa here.” I suggest with respect to the free market principles you claim profess allegiance to you are indeed “outa here”.